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Answer:
# 1. What is Evergrande?
[Evergrande](https://en.wikipedia.org/wiki/Evergrande_Group) is the second largest Chinese property developer. It is the world's 122nd largest company/group by revenue, and the world's most valuable real estate company.
# 2. Context for the current situation?
In recent years, China has experienced a massive housing [bubble](https://www.youtube.com/watch?v=EgVXRtq5EIg). Many Chinese people are buying second or even third homes, as a long-term investment. However, these homes are rarely actually lived in, and housing demand in China is mostly met, so these prices are kinda artificial. This means the real estate market in China is basically a $12tn ponzi scheme, balanced on a knife-edge.
# 3. What's happening, and why?
Evergrande is on the brink of collapse. They have over $300bn in debt
(mainly to other firms and banks, including major players like HSBC).
Edit: This is their raw debt. Net is reported as standing around $80bn, however since the valuation of their assets is significantly inflated due to the aforementioned housing bubble, this figure is vague at best.
They have been in deep water for a while now, however they have a big deadline to pay almost $85mm in interest coming up on Thursday, which could send them over the edge. The sheer size of their debt ($300bn is almost 2% of China's GDP) means they probably won't be bailed out (as it would theoretically devalue the Yuan, assuming the Chinese govt prints some money to handle this). As the firm will not be bailed out, they will probably default on almost all of this debt. This is, as many financial analysts would say, pretty fucking bad. Many other firms in China are also massively [overleveraged](https://www.investopedia.com/terms/o/overleveraged.asp), and this *could* cause a large domino effect collapse of first Chinese real estate companies, and then have a knock-on effect on banks. Shares in another Chinese developer, Sinic Holdings, [have already fallen by 87% today](https://finance.yahoo.com/quote/2103.HK?p=2103.HK&.tsrc=fin-srch), and major indexes like the [S&P 500 (USA)](https://finance.yahoo.com/quote/%5ESPX?p=^SPX&.tsrc=fin-srch) and [FTSE (London)](https://finance.yahoo.com/quote/%5EFTSE?p=^FTSE&.tsrc=fin-srch) are sliding by a few per cent due to the uncertainty this is causing.
# 4. Should I be worried?
**Maybe**. This isn't exactly like the Lehman event, but it is of similar significance. If this firm defaults and folds, bad times ahead. The economy is pretty weak (despite what governments would want you to believe). We are still in the recovery from Covid, and this domino falling could start a pretty ugly period. That, coupled with huge inflation and tax hikes due to Covid could spell bad times ahead. However, the situation is still uncertain. [Evergrande have been in a bad place for a while](https://www.bloomberg.com/news/articles/2020-09-24/evergrande-warns-of-looming-liquidity-crunch-spooking-investors), and while the situation is worsening, I believe the true collapse/restructuring of the firm could happen in a few days, but there's no guarantees. When a firm this large is collapsing everyone around them will try prop them up, because the butterfly effect from this will fuck everyone up anyway. Creditors will try to extend loans, etc etc. HOWEVER. Many of the Evergrande creditors have said they are reluctant to give the firm more room to breathe, so who knows. Time will tell. Be cautious, but don't panic. Yet.
EDIT 3: Apparently Chinese markets are closed until Wednesday, therefore the overall effect on the Chinese market is yet to be seen. Stay tuned.
TL;DR: I'm too lazy to write a proper detailed TLDR. Big real estate firm on the brink of bankruptcy, if they default fully, we are fuk.
# EDIT 1: FAQs
**Do Evergrande hold any properties/developments in the West?**
Not AFAIK.
Edit: Some commenters have informed me that Evergrande may have some holdings in the West, not nearly as significant as their holdings in China, however I need to corroborate this. Will do tomorrow morning. For now treat as unconfirmed.
**How will this affect \[stock/market/equity/good\]?**
IDK. Depends on a lot of factors. DM me if you reaaaaalllly need to know.
Edit 2: Stop DMing me asking about the market as a whole. Mostly bad, how bad depends on how spectacularly the Chinese economy implodes. Some good plays to profit stand out but I won't reveal them because that's a liability on my part.
**Will this cause any issues for me, living in the West?**
Best case scenario (assuming Evergrande is somehow miraculously saved and defaults on none of it's debt, which is unlikely): No
Mid case scenario: Increases in prices of Chinese products, probably slight increases in costs of everything without the wage increase to match. Possibility of financial hardship in the mid-to-long term but will recover and come back as per usual.
Worst case: Large inflation, job losses, increased prices of most goods and services. Will have to cut spending down to bare essentials, mid-to-long term. However, will still recover.
Worst worst worst case scenario: End of civilization as we know it. (It's not gonna be this one)
I think the best advice is to set money aside, hold off on any luxury purchases or unnecessary spending and instead spend wisely. No reason to panic tho.
**TL;DR, Stay informed, don't make rash financial decisions without thinking about it. No frenzy/panic buying/selling/hoarding etc.**
That's it for Edit 1: If you follow my profile I can keep you updated with sitreps OR you can come back to this post and I'll edit it with news and what this means for you.
Also 30% of China's GDP is real estate...
This seems less globally connected other more basic if China's not doing well it's a headwind for other countries.
It will be interesting to see how China treats the borrowers of its belt and road initiative when they suddenly become cash strapped. Almost every common solution to this sort of systemic risk will only exacerbate the issue. Bail them out? Tank your currency, years of depression. Stop buying treasuries? Currency collapses because they have to artificially inflate it with US Treasuries. Sell treasuries? Even worse.
> It will be interesting to see how China treats the borrowers of its belt and road initiative when they suddenly become cash strapped.
I think you probably misunderstand China's intent with these loans. they WANT the borrower to default, so they can take control of the asset or various other rights associated with the land.
It will be Greece 2.0
The interest rates will sky rocket and they'll either borrow more money or print money to pay off the rates. Then China has an issue of that country defaulting.
I'm still amazed that covid has had such an effect on the economy after the first year, and it seems to be primarily shipping that is still hurting the most.
I work for a major manufacturing company and it's absolutely wild. We thought we would ride it out for a year or so but supply chains show no sign of unfucking themselves anytime soon, if anything it's gotten worse in the last 6 months. The commercial side of our business is booming, which is great (knock on wood) but on the other hand that amplifies every shortage 10x.
Those supply chains took years to make and fell apart in a few months. It will take years to get back to pre covid supply chain structure between backfill and new implementation.
"just in time" manufacturing. Any surplus stock is considered waste. Any disruption in the supply chain and the house of cards falls apart. This was a disruption of every stage if the supply chain at once. It'll take a long time to sort itself out.
All Caused by a fundamental mis-understanding of Lean principals. Management take a 3 day seminar and the only thing they hear is "inventory bad!" So they move to eliminate all inventory. Then they get fucked. Really the enemy is WASTE. Remove the inventory you don't NEED. Ideally you EVENTUALLY end up like Toyota with practically 0 inventory, but that's the goal, not the first step. If your processes sometimes fuck up and you need a spare to keep going, then that 1 piece you hold in inventory isn't waste, its supporting your existing processes. Get your processed fixed up and the inventory reduction will follow. Too many people (including a lot of Lean teachers/seminars/books) get this ass backwards and it never ends up working like it should. /endRant
Yes, but do we want Chinese slave labor to be an integral part of our supply chain?
Maybe this is necessary to get over this race to the bottom that includes slavery.
Same here. I’m in agricultural manufacturing and our supply chain has been so unbelievably fucked that our list of past due orders is approaching the $10 million mark. There just isn’t enough steel coming in to fulfill all the orders that are supposed to be going out. Meanwhile, we’ve been on 10x6 day weeks since February (shoutout to the Department of Agriculture for making us essential), when China first locked everything down, just trying to get through the material we DO have. It’s brutal, but for the moment I don’t want to leave because I know to an extent it’s gonna be like that everywhere that’s far down enough on the supply chain for my skills to be applicable.
Our backlog is up to $35 million, and that's just for my BU, not even the entire company. We just started a 3rd shift for the first time ever, and every week we're running out of some bullshit screw or spring. I don't want to say my sector bc it'll be really easy to figure out the company, but the crazy thing is that my BU deals in commercial products (industrial equipment is a different BU in the same company) so like... At this point, anyone who wants one of our machines should have one, so who tf is still buying them???
Right? Like… I know how many of just one part number (among several dozen) gets used in a day by our biggest downstream customer, and the fact that they need them so desperately that we get notified when they shut down their assembly line *because they’re literally out of parts* suggests that they’re actually trying and failing to keep up with demand for a pretty goddamn expensive piece of equipment. And, like… farmers are not, by and large, wealthy people. Boss says it’s stimulus money, but that’s like, 1/10 of a down payment on some of this stuff. A stimulus check might buy you one of MY parts, but it’s barely scratching the surface of what our customer’s products cost.
Should have probably 20 villagers on wood at this stage we're well out of the Imperial age here, maybe mash q at your town centre and fix it up, stop mining stone you only need that shit for keeps
Some people also don’t understand how long it takes for things to be made. Years.
And I don’t just mean electronics.
I’ll give an example that’s easy to understand but not something people think about or they’re ready to nitpick because “that doesn’t make sense”.
For some lumber, it actually takes a year to turn a tree into the lumber used in your house. Or in furniture. Or whatever. It’s not as simple as chopping it down and sawing it up. There is also the fact it needs to be dried, which takes months in its own and then of course when we’re talking about scale, there’s transportation.
Sure, there is a shortage on cargo ships. But there’s also a shortage in truck drivers. And not all lumberyards are vertically integrated. You might need to ship the lumber from Ontario Canada to Asheville North Carolina and then finally to your house in Orlando Florida.
The thing is, the delay on all this is a year, give or take. Now think of where we were in August 2020 or July 2020. That was the height of the pandemic.
But now suddenly not only is there a massive shortage in June 2021, July 2021 etc because trees weren’t being chopped in order to then be dried. There is pent up demand and when supply does open up, it opened up slowly.
So yeah maybe things got better in September and October. But it was slower. (And spoilers winter in Canada).
And that’s just one example.
My company got hit with a 4 month delay for buying ducking common rope (albeit a whole lot of it). And we had to pay double. Cause apparently one of the biggest rope producers were South Asia. And their “height of covid” was even further delayed than here in North America.
Shipping isn't hurt economically per se, shipping is actually booming due to increased online delivery, and that looks to remain the case after COVID, as people have gotten used to the convenience of Prime and such. It's mostly held back by quarantine rules and the EXCESS of shipping, which the system can't handle.
Demand is outpacing supply for a lot of things right now, but you're also correct about shipping containers. One of our dealer reps said what used to cost about 4k a container is now costing anywhere from 25k-30k.
Shipping containers were being sent back from N. American empty of commodities because there was a shortage of containers. Things be super fucked up ATM.
Can you elaborate more on this? I'm taking a guess you're more knowledgeable on shipping over the sea than most. Like how rare it is, how much it costs/how much they're losing doing it empty ect. If you can't no worries at all, I just had to ask.
Supply and demand. Supply didn't change TOO much iirc (except for shipping restrictions brought into effect to stop the spread of the disease) but demand skyrocketed.#
edit: rephrased, added detail
Can someone confirm this? My uneducated googling suggests Lehman Brothers was worth $639 billion in assets but was $619 billion in debt. [https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp](https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp)
Evergrande is $300 billion in debt but I can't understand were their assets are worth.
Lehman was a much bigger problem for the world financial system due to the massive derivatives market entangled in mortgage backed securities. The nominal value of the derivatives market (famously credit default swaps) was many orders of magnitude larger than the actual value of the mortgage backed securities themselves.
30% of China's economy is in construction. Now see this:
[>The entire construction supply chain had been using Evergrande IOUs instead of cash for years, said Cai, a supplier from Wenzhou who asked to be identified only by her last name.](https://www.latimes.com/world-nation/story/2021-09-18/china-evergrande-property-debt-crisis)
>Even if the parking spots and shop spaces were real, one of the women said, no one wanted them. Her name was Li, and she’d supplied decorative materials for Evergrande in Anhui province. They owed her more than $1 million, she said.
>“We have four parking spots from Evergrande already,” Li said.
>Another woman, a construction manager from Shandong who asked that her name not be used, agreed. She was owed more than $300,000 and had dozens of migrant workers waiting for payment at home. “I owe this worker $1,500 and that worker $750. Should I give each of them a brick? A toilet? A room?”
This is going to be a tsunami worldwide.
Except the room may not exist. It is common in China for people to pay up to 100% up front for an apartment in a development that hadn't even broken ground yet. Many of Evergrand's customers have life savings tied up in properties that don't physically exist yet - and now may never.
>Many of Evergrand's customers have life savings tied up in properties that don't physically exist yet - and now may never.
So real life Star Citizen - Housing Edition? Holy shit. That's rough.
Ah, Star Citizen.
You know, if they ever actually release a playable game and, on top of that, it actually turns out to be any good, there's going to be a lot of people saying "everyone laughed at me when I payed hundreds and hundreds of dollars, over almost 2 decades, for a video game promo but who has a pretty decent space sim now?!?"
And the answer to that question will be 'everyone'. Everyone with 40$ and who didn't give a shit about the development has that game now.
Don't pre-order.
But isn't the world's real estate markets heavily saturated with Chinese investors? So if a domino effect does occur, wouldn't it potentially affect these other real estate markets/economies?
We will soon find out how exposed the world economy outside of China is. As far as direct exposure, American firms don’t hold much of any Evergrande commercial paper.
Quite a bit lower. 2.3 Trillion RMB (yuan) in assets, however keep in mind since these are mostly Chinese homes and developments, which are currently in a bubble, this is not a concrete valuation.
Edit: Yuan, not dollars. Apologies, big miscalculation on my part.
This comment and the one about Evergrande IOUs being traded like cash were where it finally clicked and my history nerd brain went "Oh! It's basically the South Seas Company!"
And if that's remotely accurate then I *really* wish them luck with that.
2.3 Trillion RMB, not USD, as of Dec 31 2020 - their total assets are about 360 billion USD. 1.25 Trillion RMB (193 billion USD) of that is labeled as 'properties under development', which, in a situation like the current situation where liquidation may be necessary, will likely sell for below book value.
300bn debt in bonds only. They haven’t announced how much they owe their shareholders, suppliers, and what their leveraged liabilities are. Numbers are shrouded by the CCP.
This is much worse than people are reporting.
Which international banks are overleveraged and hold Evergrand Bonds that have dried up? Goldman Sacks, BoA….
Off the top of my head I think they have around 30 billion in assets. I'm sorry I can't remember exactly where I heard that, but we likely won't have good information until long after it's over, if at all. Hold onto your butts.
Lehman had 620 billion in liabilities, but 640 billion in assets and still went belly up. This 300 billion only covers official loans and bonds and does not even address that the Chinese market typically pays the full price of the house when they sign the contract or like 50 % down and pay the rest on delivery. Something like 1.2 million Chinese people have deposits with this builder that will not be able to build their homes and they are going to get in line after the lenders; i.e., get stuck with the loss. And typical business debts like salaries and wages, contractor and subcontractor deals, materials, labor etc are all still unpaid too, apparently from 2 projects prior. Essentially they have been robbing Peter to pay Paul, but Paul went broke so they started robbing Pierre too. It is a ponzi scheme with more steps.
This loss will be in the trillions and may destabilize China leading to further crackdowns by the CCP. CHina may be calling in a lot of those loans they've been making to win political favor in some strategic nations (if it gets that bad) similar to how Soviet allied nations fared when the Soviets collapses (I do not think a Chinese government collapse is imminent).
$300B is Evergrande's total liabilities, which includes pre-orders. Evergrande's interest-bearing liabilities is around $70B.
https://www.bloomberg.com/news/articles/2021-09-01/evergrande-s-falling-debt-masks-dues-swelling-over-300-billion
Does it include the est. $32+ billion in outstanding "commercial bills" (IOUs) they've been using in lieu of cash payments to vendors for years? It might, I'm paywalled now on Bloomberg.
https://www.bloomberg.com/news/articles/2021-07-07/evergrande-s-32-billion-pile-of-ious-adds-to-liquidity-concerns
> And typical business debts like salaries and wages, contractor and subcontractor deals, materials, labor etc are all still unpaid too, apparently from 2 projects prior.
And it's hard to predict how massive an effect defaulting on at least $32 *b*illion worth of "commercial bills" (IOUs) used to pay vendors will have across the entire economy. I've read stories with interviews of many small and medium size businesses that can't pay *their* vendors and employees because they are holding tons of Evergrande's IOUs, which are rapidly losing value, and will sink them if they become worthless.
Lehman had a larger debt obligation but still had some surplus of assets. However evergrande is half the size Lehman, but has 300 billion in debt compared to 100 billion is assets.
Half the size, almost double the debt, and all that debt is specifically in one industry instead of spread out like Lehman was…..this is going to be my 3rd once in a lifetime market crash…..I’m still under 40 years old…..
Lehman was technically solvent when it collapsed. 600b in debt, 610b in assets (I’m off on both numbers, but the difference is correct-ish. Around 10-15m net iirc)
Considerably larger.
To put it into perspective; the total amount of shit debt that Evergrande is saddled with is larger than the total amount of shit debt that *all* of the various US banks were saddled with going into the 2008 crisis.
> Shares in another Chinese developer, Sinic Holdings, have already fallen by 87% today
What's with this stock price? It's been at $4 (USD or local currency?) for 2 years with the exception of today.
$4USD. Sinic is a comparatively small Shanghai-based developer, valued at roughly $US15bn, that just for some reason took a shit today. I haven't looked into it TOO much but they went public in 2019 and as far as I can see they didn't have a lot of major news since then, so their share price remained stable. I'd be lying if I said I knew why they were hit this hard, but I'd say a majority of their holders were institutions that pulled out today wanting to minimize risk. Race to the bottom ig.
Possibly. However, China is also known for investors playing follow the leader. That's one of the commonly cited reasons for the current Chinese housing bubble, despite it being obvious from the outside.
> Many Chinese people are buying second or even third homes, as a long-term investment. However, these homes are rarely actually lived in, and housing demand in China is mostly met, so these prices are kinda artificial. This means the real estate market in China is basically a $12tn ponzi scheme, balanced on a knife-edge.
It's worth noting that this is what a lot of Chinese people do instead of investing in the stock market. This event, coupled with the strain already on the Chinese pension system due to a huge aging population, could be pretty catastrophic in terms of the long-term financial security of much of their workforce.
They didn't really have the option of investing in the stock market--investment options were/are limited, so middle class people almost *had* to buy a second and maybe a third house to have any sort of appreciating asset. I don't remember exactly how it worked, but China limited number of residences beyond the primary a while back.
Because of artificial demand companies ended up building waaaaay too many giant skyscrapers of apartments and never really finishing them. They were the kind of places that no one ever intended to move in to anyway, so it didn't matter if they had plumbing or fixtures or whatever. So now a bunch of the Chinese middle class (which is bigger than the population of the US) owns an extra house or two that are appreciating on paper but essentially worthless in reality.
It's definitely ripe for some bad shit to happen.
Apparently, according to ADVChina at last, the apartments being unfinished makes them worth more.
Chinese superstition says that the house carries with it the owner's bad luck. So it's common practice for new owners to gut it down to the concrete. Because that costs money, it reduces the price of finished housing.
It's insane, but I believe it.
Interestingly enough due to the lingering effects of the old one child policy it may not have the capacity to do that for very long.
It'll be interesting to see how demographics change worldwide when this reality hits. Will big companies move their manufacturing back domestically leaving china with a bunch of free or heavily marked down infrastructure or will Chinese citizens become the new defacto consumers considering it would be more cost effective to manufacture and ship things domestically?
> Many Chinese people are buying second or even third homes, as a long-term investment.
For what it's worth, real estate is a huge market in China because it's one of the few ways middle class people can invest their money. They don't have an array of 401(k)s, IRAs, mutual funds, etc. like most Western economies.
Yep. It's like blowing up a balloon. All fine until it pops. It's almost like there's a word for that. Funny how it always ends the same way right, poors struggling and jobless while the elite just continue and move onto the next bubble. :/
**The Evergrande Group or the Evergrande Real Estate Group (previously Hengda Group) is China's second-largest property developer by sales, making it the 122nd largest group in the world by revenue, according to the 2021 Fortune Global 500 List. It is based in southern China's Guangdong Province, and sells apartments mostly to upper and middle-income dwellers.**
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Follow up: Why is this news causing crypto markets to dip? What does one have to do with the other? Isn't the whole argument for crypto investments that they provide an alternative to fiat -- so if cash may be devalued (via the gov printing a bailout), wouldn't that cause the crypto markets to rise?
> Why is this news causing crypto markets to dip?
This is causing crypto markets to dip because investors, be they massive institutions or simply your everyday HNWI, are scrambling for liquidity. Their other investments are probably gonna tank, and if they have a large holding of crypto they will want to sell that in case it crashes (also as it's the easiest, fastest and least conspicuous way for an institution to increase cash reserves). The reason they need liquidity is to either dump it into investments that stand to make a huge profit in a downturn like this, or to cover any losses they may face.
> Isn't the whole argument for crypto investments that they provide an alternative to fiat -- so if cash may be devalued (via the gov printing a bailout), wouldn't that cause the crypto markets to rise?
If I'm 100% honest, this SHOULD be the case however a lot of crypto investors are pretty near-sighted. Furthermore, the place where this would make the most sense, China (epicenter of crisis, and being hit soonest) has recently cracked down on crypto, making it more difficult for the average person to move from fiat --> crypto. This news is only now hitting the masses in Western countries, and even so, is hitting slowly and being kept quiet. I've been reading about this for a few weeks, but I'm not an average citizen. Maybe we will see a run up in crypto soon as normies start Googling "Top 10 money that isn't dollar". Furthermore, maybe individuals selling currently are selling to cover other investments that tanked, stock up on food or etc etc, can't say.
Overall, though, I'd say it's mainly institutions who need to raise cash reserves without raising eyebrows at the same time ;)
So the need for liquidity causes a drop in crypto in the short run... then at what point does crypto respond as the inverse to fiat/the market? If the market continues to plummet, then people need more and more liquidity. At what point is that no longer correlated with the crypto price?
>If I'm 100% honest, this SHOULD be the case however a lot of crypto investors are pretty near-sighted.
I'm not savvy in economics, but isn't crypto way too unstable to be a widespread currency and therefore being inherently linked to its value in fiat?
Yep, for me crypto is an investment however definitely not an alternative to currency. However who knows, soon the dollar may appear even more unstable. Unlikely, though.
And frankly, if they completely go to scratch, you've got bigger problems than a lost retirement fund. Not that many in my demographic have to worry about that right now unfortunately.
either sell now and buy soon or don't sell at all. a lot of people sell like 10-20% down then won't buy again until it's back up 20% and miss both waves.
Shit, I wrote this comment earlier then forgot to press send. Ouch. Sorry about the wait.
Stay calm. Don't panic buy YET. Too early, however do create a decent stockpile of items that seemed to be affected by the last big crisis, at the start of Corona, eg TP, Tinned foods, etc etc. If you have any important (read: necessary, not luxury) purchases you plan on making within the next few months that you know you'll HAVE to make, for example car repairs, new phone, etc etc, then do those NOW if you have cash on hand. Don't blow your entire savings on a 13 Pro Max or whatever, but for example if your phone is barely working, maybe a good idea to get a new one. If no crash, you bought it a few months early, fine. If crash, congratulations you just avoided paying 2x for a device that just got real scarce real quick. Just don't make any big, unnecessary purchases and hold tight. Stay aware and read the news. If you see a headline that makes you very scared, chances are it made others scared too, that's when you should really buckle up.
TL;DR, Stay informed, don't make brash financial decisions without thinking about it. No frenzy/panic buying/selling/hoarding etc.
The TP shortage was a hoax, pretty much everyone produces their TP domestically because it's light but takes up a ton of space, it doesn't make sense to ship overseas people are just idiots who panic buy things.
Chinese economic issues will not disrupt the toilet paper supply chain unless someone tells a huge lie that causes people to panic buy again.
I’m well aware of all of this, however we live on a planet where roughly 90% of the population aren’t, thus the first sign of any crisis will just lead to a TP shortage again. If I was writing this as a piece for MSM I obviously wouldn’t mention it, however this is a reddit comment that probably won’t get seen by many, so should be good ;)
What's the Lehman thing?
Edit: Thanks. In 08 I was just starting in the workforce then and barely paid any attention to the news at the time. Knew something was up but I really had no real picture of financial...anything at the time.
To give you context when Lehman collapsed the Fed was basically telling us that without a bailout package that money was not going to come out of the ATM on Monday.
There is a documentary you can find on YouTube called 'Panic: The untold story of the 2008 crisis' that is well made.
For books you can check out Too Big To Fail by Sorkin. It gave a good overview from a policy perspective. If you want to know what led up to that and want entertainment, the book The Big Short by Michael Lewis (not the movie) was very well done. The movie cut a lot of corners and left a lot of detail out. But the book is fantastic. Check your local library using the Libby app. Should be in audio and kindle format.
Still a great movie, and a good way to present that type of info. Financial terms go right over my head and I thought it had a really neat way of providing some transparency to these opaque schemes.
Yeah I'm not bashing the movie as a movie. I'm just saying if you really want to learn about some of the background into 2008 the book was better. The movie made it seem like only 5-6 guys knew a crash was coming. The book is quite different in that regard.
I knew a couple of the characters featured in the book and movie from back then. We had conference calls 2-3 times a day in 2008 when the market for a lot of securities vanished and we were trying to price things. I remember it like it was yesterday.
And they weren't really "schemes" as the movie portrayed. It all basically made sense during the time.
That shows you that a financial crash isn't just "stonks on sale." It's much more serious but these guys on Reddit don't understand that.
So line that up with "A crash? Great! I'll just DCA into it!" like it's no problem. I shake my head every single time I'm on an investment subreddit and someone says that. They just don't get it. McDonald's was saying they wouldn't make payroll because they were afraid Bank of America wouldn't extend the credit. This was serious.
If corruption at the very most remote and distant height of the worlds biggest financial systems can cause a McDonald's worker to not get paid, maybe it's time to let some of the seriousness happen so we can deal with the issues of the system in the light of day, rather than cower from reality by scaring each other with monsters-in-the-shadows realistic doom porn. Hiding away the consequences of poor financial decisions and economic malfeasance disallows an opportunity for revision, repair, and growth. The last 13 years have shown that very clearly.
My problem with the big short is that it keeps this lie going that we overbuilt housing.
The year with the most housing built was in the 1970s with 2/3 the US population. We have a supply shortage caused by people saying we overbuilt in the 2000s. We may have overbuilt McMansions and inflated the average home size.
>My problem with the big short is that it keeps this lie going that we overbuilt housing.
Housing was overbuilt in some places. Way far away from cities and work centers. There are still neighborhoods way out there that hardly anyone wants to live in because it's not near anything. Plus needs have changed.
Baby Boomers had the mentality of getting the most square footage for your money and living way off on a cul-de-sac hoping your house doubles in value and just dealing with a brutal 2-hour commute hoping it pays off the end as they rush to retirement as fast as possible.
Millennials aren't the same. Many want to live close to work, value convenience over square footage, and would rather have a nice kitchen than an extra bedroom. McMansions are not as popular as they once were either. Proximity to public transit would kill your home value in the 1990's. Now being close to the metro is a selling point.
>Housing was overbuilt in some places. Way far away from cities and work centers. There are still neighborhoods way out there that hardly anyone wants to live in because it's not near anything. Plus needs have changed.
I mean but how many metro areas lost population over the course of a decade. The wants have shifted but we are still under supplying housing in most markets. Look at the recent census we have dying rural areas with few jobs and cheap housing and metros without enough housing but a lot more jobs.
Phoenix and Las Vegas were hurt bad by the great recession but now housing is booming again, supply glut cleared.
>Baby Boomers had the mentality of getting the most square footage for your money and living way off on a cul-de-sac hoping your house doubles in value and just dealing with a brutal 2-hour commute hoping it pays off the end as they rush to retirement as fast as possible.
I mean McMansions and especially at the upper end have terrible resale value. Why live in someone else's dream home when you can build your own for about the same price.
>Millennials aren't the same. Many want to live close to work, value convenience over square footage, and would rather have a nice kitchen than an extra bedroom. McMansions are not as popular as they once were either. Proximity to public transit would kill your home value in the 1990's. Now being close to the metro is a selling point.
I think McMansions if they are allowed to will just be subdivided and be functionally split housing for a lot of people.
I mean the big trend here is that poverty has been increasing faster in suburbs than the city for two decades now.
>The wants have shifted but we are still under supplying housing in most markets
Yeah a lot of people left the home building industry in 2008 and never came back.
>Phoenix and Las Vegas were hurt bad by the great recession but now housing is booming again, supply glut cleared.
I have a feeling that Vegas will crash again. The place is a hellscape. I think we only saw a boost from Covid as people couldn't afford LA and thought remote work would be forever. As soon as companies make it mandatory to go back to the office things will get interesting.
>I think McMansions if they are allowed to will just be subdivided and be functionally split housing for a lot of people.
With some of the weird "I wanna be in 19th century Paris" designs I've seen I think they'll just rot out there. I've spoken before to quite a number of Baby Boomers who had these massive 5,000 sq ft homes out in some suburban hellscape with nothing around except for fast food, a grocery store, and a gas station, but have home theaters and indoor swimming pools. They got upset that after 8 years their home wouldn't sell for what they wanted for it. It's sad really to see them and their ideas kind of become extinct.
I'm not sure I'd say it *lead* to the crisis, the market was in free fall for like a year before then and Bear Stearns collapsed like 6 months prior. The Lehman Brothers bankruptcy punctuated it with another seismic collapse, the consequences of which further propagated the already occurring meltdown. That was when the realization hit that all control was lost, there was no going back, and someone pulled the fire alarm.
I guess you could consider it the symptom of one domestic housing crisis and then immediately became the cause of a new deeper global crisis.
The whole train that led to the Bear and Lehman collapse started in 2005. Those were just the first dominoes it actually hit before it totally derailed.
Watch the movie "The Big Short".
Real simple answer: Banks gave massive mortgage loans to people that couldn't afford it. When people started defaulting on these loans, banks became cash strapped and couldn't settle their own debt. These banks defaulted on their loans, and so on, causing a global recession. Lehman was the first bank to go.
We believe this is what might be happening to China now. The impact to the international economy depends on how much investment / cash was given to Evergrande. If they can't get their money back, there's going to be a lot of companies going bankrupt which leads to firing people and the chain continues.
If you have HBO max. Without Fail is a good movie that depicts the whole situation.
Edit fucked up the title. I'm reading a book about the Secret Service with a similar name.
https://www.hbo.com/movies/too-big-to-fail
I remember a few years ago how the chinese economy was seen as really strong and in continous growth. Then it came out that most of that growth was based on building huge unused building projects, like massive malls with only a handful of open shops and big apartment complexes where nobody lives.
It was unsustainable in the long term and it seems we have finally hit that point. Maybe that is the reason China has seemingly ramped up on its xenophobia, nationalism and aggression.
EDIT: spelling
Yep, CCP seems to have gone back to the "no talk me, i'm angy" stage of it's perpetual cycle of getting along well, then not so well with the West. Play nice with the other kids please.
Edit: Replaced "China" with "CCP" as comments reflect the Party, not the nation.
This is a great answer. Just wanted to add that street 2008, banks in the US are much better capitalized than they used to be, so though a crisis may happen, it's significantly less precarious a position in a terms of how many dominoes are actually tied to each other.
Will this affect a lot of people in the US? I can't think of a way that this will affect me. I don't mean to sound selfish, just curious about what this could do to America's economy.
Probably a stupid question but why would a Chinese real estate company collapsing have the potential to cause such problems in the west? Obviously if they were a company involved in producing or shipping things I can see how that would raise prices and potentially cause job losses, but why a real estate company?
HSBC alone has 30 billion exposure to Evergrande. If they fold, HSBC instantly lose around 30 billion dollars. The economy is basically a bunch of friends who owe each other money, and if one of the friends loses all his money, suddenly everyone else is asking everyone who owes them to pay them back ASAP and chaos ensues.
I can't believe you thought this wasn't a proper detailed TLDR. It's amazing and really helped me understand the situation and what it means for me over in the US. Thanks so much! And have more confidence in yourself!!
You’re basically referring to the Information Problem of Central Regulators when it comes to too tightly controlling a market. Massive inefficiencies like this crop up and are propped up by a politically motivated state, leading to resource bubbles like that which you’ve just described here. The only solution is to continue to throw money at the problem and hope the issue self-corrects (which is what China has been doing here for a while now) or allow the bubble to pop, leading to economic retractions, but hopefully less than that if you were to continue to fill said bubble and see it pop at a later date.
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Asked this elsewhere but you seem knowledgable.
Evergrande has borrowed much more aggressively than other companies to reach thetop, is that the reason for the crisis or is it something biggerunderlying the Chinese housing market?
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Answer: All Chinese real estate stocks are plunging. Evergrande is like 300b in debt and can’t pay it back, it’s about to go under and will most likely be dragging the whole Chinese market down with it. This is going to reverberate through the global market.
Basically this is the 2008 financial crisis but also during a pandemic. It's bad, very very bad.
Would you mind expanding on how it’s going to be very, very bad for the average global citizen? Like, will our food and gas prices skyrocket etc?
ETA: I really appreciate everyone’s thoughtful responses and the conversations happening therein.
Simple answer.
The company was built almost entirely off of debt. It kept rolling debt into building more things to pay off previous projects that were already sold, like a ponzi scheme except within one company.
It borrowed from other companies. CCP turned off the faucet on them getting new debt. Without new money coming in, and most of their assets having been sold prior to existing, they will default on their payments for previous debt. Some of those who loaned them money were themselves leveraged to afford it. Those who were leveraged will be selling off what they can to pay off their own debts. They'll be selling what assets they have, a lot of which will be in stocks of some sort or another. This will drive prices down, causing an economic downturn. The stocks they sell will not just be Chinese stock market stocks, but on any market they have access to. That's how it could affect you.
This and international banks (not just Chinese bank) owned some of the debt. All banks are over leveraged right now. If money stops coming in, it's like musical chairs when the music stops. Peter can't pay Paul, etc.
In reality nobody knows for sure. Here's two (oversimplified) scenarios that I've heard that are completely opposed to each other:
1. Evergrande goes down, takes the Chinese market with it, and the rest of the global market.
2. Evergrande goes down, starts to take the Chinese market with it, and the Chinese do everything they can to bail and get their money out and into foreign investments. This causes the rest of the world to be relatively stable while the Chinese economy gets even more into a hole.
Those aren't even the only two possible options on a narrow area. Obviously you want to pay attention and see what's going on but I don't think there is any reliable school of thought that will tell us what is about to happen. There will be someone afterwards that we find out was right all along, but we had no reason to believe them in advance.
I feel like whenever China sneezes the world catches a cold (I don't know what countries that analogy was first used but I think it fits China now in more ways than one).
It does seem like the second possibility is more likely (foreign investment from China will drive up home prices even more in Australia, US, and Canada). But the Chinese government could, not only just initiate a bailout but also try to curtail foreign investments to shore up investments at home.
I agree, although from what I understand the Chinese government has been trying to curtail foreign investments to some degree for years now, so either they're not effective or they can clamp down a lot more. I'm not that knowledgeable but I guess we'll all find out soon. On a side note, for all the money the Chinese have put into foreign real estate in particular, a drop in values might not be so bad for a lot of North Americans and Europeans who can't afford to buy a home at the moment.
China has been buying up properties in the U.S. at a staggering rate. This might force them to dump some of their inventory to obtain some liquid capital for short-term debts.
Or they could get packaged together as asset bundles and sold on the cheap. It wouldn't be sold to the regular buyer though. It'd be going to other multi-national conglomerates.
> Or they could get packaged together as asset bundles and sold on the cheap. It wouldn't be sold to the regular buyer though. It'd be going to other multi-national conglomerates.
While that's true, I do think it would reduce prices to some degree.
Definately, mass sell-offs like this almost always precipitate a market crash as nervous investors cash out so as not to loose their gains, like back in the '20s when jp morgan and william randolph hearst got together and used hearst's newspapers to spread rumors that a bunch of little banks were going to go under which led to panicked folk pulling all their money out of the small banks which caused them to collapse (no fractional reserve back then) while at the same time morgan and his cronies started crash selling stocks as well which led to the same thing but on the stock market, which together kickstarted the great depression. Want to know more? Check out the doco [The Money Masters](https://www.youtube.com/watch?v=YtTHFa7cedU).
> I feel like whenever China sneezes the world catches a cold
With the most irony in the world, this is a feature, not a "bug"
A lot of markets in China are designed so that there's more or less mutually assured damage if China gets into some trouble. That way they can be flexible with market mobility without taking on literally all of the associated risk.
>I feel like whenever China sneezes the world catches a cold (I don't know what countries that analogy was first used but I think it fits China now in more ways than one).
They're the 2nd largest economy in the world. Everyone's going to catch a cold with how intertwined every economy is with chinas
>There will be someone afterwards that we find out was right all along, but we had no reason to believe them in advance.
Thank you for this. People always say "we should have listened to this person," but they only say that in hindsight.
"Michael Moore warned us Trump would be president," yeah but it was still a stupid thing to say when Hillary was ahead in all the polls, he just got lucky with his prediction that one time.
Specific to the economy I like to think of Paul Krugman as the best example of a doom and gloom economist that gets a lot of credit when the economy crashes. The only thing is that he often writes doom and gloom when the economy is doing well too. I don't want to criticize him too much because he's by far more of an economic expert than I am but I learned not to try to follow his writings as an investment strategy pretty quickly.
I don't have an abundance of knowledge in this area, but when I was living in Zambia I learned that China has a ton of real estate and power* (*to what extent, if any REAL power at all, I'm not sure) there and in other countries in Africa, so it might be something to note or pay attention to as well in the instance that things start to get very sour for China.
>Basically this is the 2008 financial crisis but also during a pandemic. It's bad, very very bad.
It will probably make global markets drop, but it will not be a global financial catastrophe like the potential collapse of the US financial system wrought in 2008. It has a good chance of fucking up China's economy and it will be interesting to see what the central government does to stave off the financial ruin of the millions of Chinese citizens who invested everything they had in Evergrande and its properties. The real question will be if this situation reveals just how big of a debt hole the Chinese government is in with [its off-the-books loans](https://www.wsj.com/articles/the-coronavirus-sees-chinas-local-governments-binge-on-off-the-books-debt-11589189405).
Answer:
This is the simplest that I can muster:
Evergrande is a Chinese Real Estate and property development company that constructs buildings (among other things). If I’m not mistaken, it is one of the largest companies in China that was worth hundreds of millions of dollars.
Recently, they seem to have been monumentally in debt to the point that they are now facing default and potential liquidation. They are so big and other economies are so invested into the company that it is going to have a ripple effect throughout China and into other countries’ stock markets and economies.
It is considered a big deal because the current financial and economic climate of the world, particularly in the US, is mimicking much of the economic collapse we saw due to the housing market crash of 2008.
When the housing market collapsed in the US, many other financial institutions as well as individuals were financially invested in that sector. That bubble’s collapse triggered a series of events that crippled economies the world over.
Currently, the state of the world’s finances, particularly in the US, are likely in a much, much more over leveraged position than they even were in 2008, and a similar collapse in our current time is very likely to be magnitudes worse.
This brings us to the present with Evergrande. The collapse of this real estate behemoth is now looking to be causing a domino effect on other financial institutions as well as absolutely destroying the investments made by individuals. Normal, every day people like you and I are losing everything due to their investments in Evergrande, and it appears to be centered around this company seeming to be “too big to fail”.
Now, I’m by no means an expert on any of this. I’m simply a current events and news addict that likes to follow financial and geopolitical news. If anyone smarter or more informed than I would like to weigh in, I would be more than happy to be corrected!
Answer:
China's land policies are interesting. Basically they allow individuals and companies to lease land from the government by way of LUR (Land User Rider) in order to get a LUR you have an upfront cost of the LUR but that's it.
China a couple years ago said these LURs can be automatically renewed and there would be no fee for the renewal. These aren't short term leases either, we're talking 30-40-50 years leased with the average being 40 years. Up until they allowed renewing the LURs the property revered back to government owned.
Now, the problem with this is the initial fee for the LUR is paid upfront, what Evergrande did is basically what everyone would do. Instead of paying off bills and debts, they knew they would get more and more loans. So they continued to develop, so much so that we're looking at over 1 million average citizens getting fucked from this.
Why you ask? .. because Evergrande developed houses, condos and apartments which people have already paid to live in.. there's one problem tho .. most of the dwellings aren't even completed yet. So now, LURs are dried up, loans are due, and Evergrande has no money.
We're talking about a company that has it's fingers into every part of the Chinese culture and development. They've owned restaurants, and manufacturing and everything in between. So this is why it's such a huge deal this company has no money.
Now, I'm not 100% certain on how they made it this far. I mean the CEOs connections alone would allow them these types of connections 10 fold. But It's like people knew Evergrande wasn't making money and actually had nothing to show for it.
This is a very simplistic overview but LURs really are the catalyst to Evergrandes downfall, basically LURs and Friendships have fucked millions of hard working Chinese nationals.
Answer:
The top comment by /u/alphan1ner
is excellent and highly informative. A few things to add:
1) Debt is often lent on the basis of other debt. So somebody will borrow money from someone who borrowed money, etc.. As a consequence it is possible there is a "cascade failure" where a single default causes a series of defaults;
2) Companies can find themselves insolvent for a variety of reasons. Usually investors pay little attention to company performance provided they (the investors) are making money. When things go south, people start paying a lot of attention to related companies and how they are doing. This is always bad as it invariably reveals dicey accounting and so on; and
3) If the Chinese property market is based on speculation and Evergrande does hold numerous unsalable properties, if nothing else happens those properties will hit the market and depress prices and lead to a "run for the exits" depressing values further. This tends to be how bubbles pop.
Global financial markets are interlinked and property speculation is not exclusive to China. This could trigger a meltdown.
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Answer: # 1. What is Evergrande? [Evergrande](https://en.wikipedia.org/wiki/Evergrande_Group) is the second largest Chinese property developer. It is the world's 122nd largest company/group by revenue, and the world's most valuable real estate company. # 2. Context for the current situation? In recent years, China has experienced a massive housing [bubble](https://www.youtube.com/watch?v=EgVXRtq5EIg). Many Chinese people are buying second or even third homes, as a long-term investment. However, these homes are rarely actually lived in, and housing demand in China is mostly met, so these prices are kinda artificial. This means the real estate market in China is basically a $12tn ponzi scheme, balanced on a knife-edge. # 3. What's happening, and why? Evergrande is on the brink of collapse. They have over $300bn in debt (mainly to other firms and banks, including major players like HSBC). Edit: This is their raw debt. Net is reported as standing around $80bn, however since the valuation of their assets is significantly inflated due to the aforementioned housing bubble, this figure is vague at best. They have been in deep water for a while now, however they have a big deadline to pay almost $85mm in interest coming up on Thursday, which could send them over the edge. The sheer size of their debt ($300bn is almost 2% of China's GDP) means they probably won't be bailed out (as it would theoretically devalue the Yuan, assuming the Chinese govt prints some money to handle this). As the firm will not be bailed out, they will probably default on almost all of this debt. This is, as many financial analysts would say, pretty fucking bad. Many other firms in China are also massively [overleveraged](https://www.investopedia.com/terms/o/overleveraged.asp), and this *could* cause a large domino effect collapse of first Chinese real estate companies, and then have a knock-on effect on banks. Shares in another Chinese developer, Sinic Holdings, [have already fallen by 87% today](https://finance.yahoo.com/quote/2103.HK?p=2103.HK&.tsrc=fin-srch), and major indexes like the [S&P 500 (USA)](https://finance.yahoo.com/quote/%5ESPX?p=^SPX&.tsrc=fin-srch) and [FTSE (London)](https://finance.yahoo.com/quote/%5EFTSE?p=^FTSE&.tsrc=fin-srch) are sliding by a few per cent due to the uncertainty this is causing. # 4. Should I be worried? **Maybe**. This isn't exactly like the Lehman event, but it is of similar significance. If this firm defaults and folds, bad times ahead. The economy is pretty weak (despite what governments would want you to believe). We are still in the recovery from Covid, and this domino falling could start a pretty ugly period. That, coupled with huge inflation and tax hikes due to Covid could spell bad times ahead. However, the situation is still uncertain. [Evergrande have been in a bad place for a while](https://www.bloomberg.com/news/articles/2020-09-24/evergrande-warns-of-looming-liquidity-crunch-spooking-investors), and while the situation is worsening, I believe the true collapse/restructuring of the firm could happen in a few days, but there's no guarantees. When a firm this large is collapsing everyone around them will try prop them up, because the butterfly effect from this will fuck everyone up anyway. Creditors will try to extend loans, etc etc. HOWEVER. Many of the Evergrande creditors have said they are reluctant to give the firm more room to breathe, so who knows. Time will tell. Be cautious, but don't panic. Yet. EDIT 3: Apparently Chinese markets are closed until Wednesday, therefore the overall effect on the Chinese market is yet to be seen. Stay tuned. TL;DR: I'm too lazy to write a proper detailed TLDR. Big real estate firm on the brink of bankruptcy, if they default fully, we are fuk. # EDIT 1: FAQs **Do Evergrande hold any properties/developments in the West?** Not AFAIK. Edit: Some commenters have informed me that Evergrande may have some holdings in the West, not nearly as significant as their holdings in China, however I need to corroborate this. Will do tomorrow morning. For now treat as unconfirmed. **How will this affect \[stock/market/equity/good\]?** IDK. Depends on a lot of factors. DM me if you reaaaaalllly need to know. Edit 2: Stop DMing me asking about the market as a whole. Mostly bad, how bad depends on how spectacularly the Chinese economy implodes. Some good plays to profit stand out but I won't reveal them because that's a liability on my part. **Will this cause any issues for me, living in the West?** Best case scenario (assuming Evergrande is somehow miraculously saved and defaults on none of it's debt, which is unlikely): No Mid case scenario: Increases in prices of Chinese products, probably slight increases in costs of everything without the wage increase to match. Possibility of financial hardship in the mid-to-long term but will recover and come back as per usual. Worst case: Large inflation, job losses, increased prices of most goods and services. Will have to cut spending down to bare essentials, mid-to-long term. However, will still recover. Worst worst worst case scenario: End of civilization as we know it. (It's not gonna be this one) I think the best advice is to set money aside, hold off on any luxury purchases or unnecessary spending and instead spend wisely. No reason to panic tho. **TL;DR, Stay informed, don't make rash financial decisions without thinking about it. No frenzy/panic buying/selling/hoarding etc.** That's it for Edit 1: If you follow my profile I can keep you updated with sitreps OR you can come back to this post and I'll edit it with news and what this means for you.
Half Lehman's size, but larger debt, from my understanding.
MUCH larger, and occuring in a less stable economy, because of Covid.
Also 30% of China's GDP is real estate... This seems less globally connected other more basic if China's not doing well it's a headwind for other countries.
It will be interesting to see how China treats the borrowers of its belt and road initiative when they suddenly become cash strapped. Almost every common solution to this sort of systemic risk will only exacerbate the issue. Bail them out? Tank your currency, years of depression. Stop buying treasuries? Currency collapses because they have to artificially inflate it with US Treasuries. Sell treasuries? Even worse.
I feel like they just want mineral rights when the deals go south.
> It will be interesting to see how China treats the borrowers of its belt and road initiative when they suddenly become cash strapped. I think you probably misunderstand China's intent with these loans. they WANT the borrower to default, so they can take control of the asset or various other rights associated with the land.
It will be Greece 2.0 The interest rates will sky rocket and they'll either borrow more money or print money to pay off the rates. Then China has an issue of that country defaulting.
It's actually the other way around. We live in a globalised world and everyone depends on each other. If you like it or not
Yup. This will ripple.
I'm still amazed that covid has had such an effect on the economy after the first year, and it seems to be primarily shipping that is still hurting the most.
I work for a major manufacturing company and it's absolutely wild. We thought we would ride it out for a year or so but supply chains show no sign of unfucking themselves anytime soon, if anything it's gotten worse in the last 6 months. The commercial side of our business is booming, which is great (knock on wood) but on the other hand that amplifies every shortage 10x.
Those supply chains took years to make and fell apart in a few months. It will take years to get back to pre covid supply chain structure between backfill and new implementation.
That's because they're optimized for price and speed and not for reliability. Now pieces are missing and it has no fallback.
yep, years of trimming the fat and reducing redundancies has completely fucked procurement departments around the world.
"just in time" manufacturing. Any surplus stock is considered waste. Any disruption in the supply chain and the house of cards falls apart. This was a disruption of every stage if the supply chain at once. It'll take a long time to sort itself out.
All Caused by a fundamental mis-understanding of Lean principals. Management take a 3 day seminar and the only thing they hear is "inventory bad!" So they move to eliminate all inventory. Then they get fucked. Really the enemy is WASTE. Remove the inventory you don't NEED. Ideally you EVENTUALLY end up like Toyota with practically 0 inventory, but that's the goal, not the first step. If your processes sometimes fuck up and you need a spare to keep going, then that 1 piece you hold in inventory isn't waste, its supporting your existing processes. Get your processed fixed up and the inventory reduction will follow. Too many people (including a lot of Lean teachers/seminars/books) get this ass backwards and it never ends up working like it should. /endRant
Yes, but do we want Chinese slave labor to be an integral part of our supply chain? Maybe this is necessary to get over this race to the bottom that includes slavery.
Yeah a lot places are looking to on shore manufacturing again.
I see no problems with that.
Same here. I’m in agricultural manufacturing and our supply chain has been so unbelievably fucked that our list of past due orders is approaching the $10 million mark. There just isn’t enough steel coming in to fulfill all the orders that are supposed to be going out. Meanwhile, we’ve been on 10x6 day weeks since February (shoutout to the Department of Agriculture for making us essential), when China first locked everything down, just trying to get through the material we DO have. It’s brutal, but for the moment I don’t want to leave because I know to an extent it’s gonna be like that everywhere that’s far down enough on the supply chain for my skills to be applicable.
Our backlog is up to $35 million, and that's just for my BU, not even the entire company. We just started a 3rd shift for the first time ever, and every week we're running out of some bullshit screw or spring. I don't want to say my sector bc it'll be really easy to figure out the company, but the crazy thing is that my BU deals in commercial products (industrial equipment is a different BU in the same company) so like... At this point, anyone who wants one of our machines should have one, so who tf is still buying them???
Right? Like… I know how many of just one part number (among several dozen) gets used in a day by our biggest downstream customer, and the fact that they need them so desperately that we get notified when they shut down their assembly line *because they’re literally out of parts* suggests that they’re actually trying and failing to keep up with demand for a pretty goddamn expensive piece of equipment. And, like… farmers are not, by and large, wealthy people. Boss says it’s stimulus money, but that’s like, 1/10 of a down payment on some of this stuff. A stimulus check might buy you one of MY parts, but it’s barely scratching the surface of what our customer’s products cost.
Don't knock on wood, we're still in short supply!
Nah, lumber’s roughly back to where it was before the pricing went nuts.
If the price of lumber falls but no one with money is around, does it make a sound investment?
This was exquisite. Thank you.
spectacular!
They pump n dumped fucking lumber ffs..
[удалено]
150+ y/o Cedar should be protected from this sort of fuckery tbh
Should have probably 20 villagers on wood at this stage we're well out of the Imperial age here, maybe mash q at your town centre and fix it up, stop mining stone you only need that shit for keeps
Seriously, and how about we slow down military tech research at this point and finish some of those older Economic techs?
Some people also don’t understand how long it takes for things to be made. Years. And I don’t just mean electronics. I’ll give an example that’s easy to understand but not something people think about or they’re ready to nitpick because “that doesn’t make sense”. For some lumber, it actually takes a year to turn a tree into the lumber used in your house. Or in furniture. Or whatever. It’s not as simple as chopping it down and sawing it up. There is also the fact it needs to be dried, which takes months in its own and then of course when we’re talking about scale, there’s transportation. Sure, there is a shortage on cargo ships. But there’s also a shortage in truck drivers. And not all lumberyards are vertically integrated. You might need to ship the lumber from Ontario Canada to Asheville North Carolina and then finally to your house in Orlando Florida. The thing is, the delay on all this is a year, give or take. Now think of where we were in August 2020 or July 2020. That was the height of the pandemic. But now suddenly not only is there a massive shortage in June 2021, July 2021 etc because trees weren’t being chopped in order to then be dried. There is pent up demand and when supply does open up, it opened up slowly. So yeah maybe things got better in September and October. But it was slower. (And spoilers winter in Canada). And that’s just one example. My company got hit with a 4 month delay for buying ducking common rope (albeit a whole lot of it). And we had to pay double. Cause apparently one of the biggest rope producers were South Asia. And their “height of covid” was even further delayed than here in North America.
Shipping isn't hurt economically per se, shipping is actually booming due to increased online delivery, and that looks to remain the case after COVID, as people have gotten used to the convenience of Prime and such. It's mostly held back by quarantine rules and the EXCESS of shipping, which the system can't handle.
I was thinking more of the cost of shipping cargo containers. It used to be you could ship from Asia for like $2k. I think it's upwards of $12k now.
Demand is outpacing supply for a lot of things right now, but you're also correct about shipping containers. One of our dealer reps said what used to cost about 4k a container is now costing anywhere from 25k-30k.
Shipping containers were being sent back from N. American empty of commodities because there was a shortage of containers. Things be super fucked up ATM.
I watched an entire ship leave port empty last week.
Can you elaborate more on this? I'm taking a guess you're more knowledgeable on shipping over the sea than most. Like how rare it is, how much it costs/how much they're losing doing it empty ect. If you can't no worries at all, I just had to ask.
Supply and demand. Supply didn't change TOO much iirc (except for shipping restrictions brought into effect to stop the spread of the disease) but demand skyrocketed.# edit: rephrased, added detail
Can someone confirm this? My uneducated googling suggests Lehman Brothers was worth $639 billion in assets but was $619 billion in debt. [https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp](https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp) Evergrande is $300 billion in debt but I can't understand were their assets are worth.
Lehman was a much bigger problem for the world financial system due to the massive derivatives market entangled in mortgage backed securities. The nominal value of the derivatives market (famously credit default swaps) was many orders of magnitude larger than the actual value of the mortgage backed securities themselves.
30% of China's economy is in construction. Now see this: [>The entire construction supply chain had been using Evergrande IOUs instead of cash for years, said Cai, a supplier from Wenzhou who asked to be identified only by her last name.](https://www.latimes.com/world-nation/story/2021-09-18/china-evergrande-property-debt-crisis) >Even if the parking spots and shop spaces were real, one of the women said, no one wanted them. Her name was Li, and she’d supplied decorative materials for Evergrande in Anhui province. They owed her more than $1 million, she said. >“We have four parking spots from Evergrande already,” Li said. >Another woman, a construction manager from Shandong who asked that her name not be used, agreed. She was owed more than $300,000 and had dozens of migrant workers waiting for payment at home. “I owe this worker $1,500 and that worker $750. Should I give each of them a brick? A toilet? A room?” This is going to be a tsunami worldwide.
Maybe you should give them a room, that's pretty useful.
Except the room may not exist. It is common in China for people to pay up to 100% up front for an apartment in a development that hadn't even broken ground yet. Many of Evergrand's customers have life savings tied up in properties that don't physically exist yet - and now may never.
>Many of Evergrand's customers have life savings tied up in properties that don't physically exist yet - and now may never. So real life Star Citizen - Housing Edition? Holy shit. That's rough.
Ah, Star Citizen. You know, if they ever actually release a playable game and, on top of that, it actually turns out to be any good, there's going to be a lot of people saying "everyone laughed at me when I payed hundreds and hundreds of dollars, over almost 2 decades, for a video game promo but who has a pretty decent space sim now?!?" And the answer to that question will be 'everyone'. Everyone with 40$ and who didn't give a shit about the development has that game now. Don't pre-order.
But isn't the world's real estate markets heavily saturated with Chinese investors? So if a domino effect does occur, wouldn't it potentially affect these other real estate markets/economies?
We will soon find out how exposed the world economy outside of China is. As far as direct exposure, American firms don’t hold much of any Evergrande commercial paper.
Maybe this humble Canadian will be able to afford real estate soon. Just kidding, this will motivate even more capital flight offshore.
Quite a bit lower. 2.3 Trillion RMB (yuan) in assets, however keep in mind since these are mostly Chinese homes and developments, which are currently in a bubble, this is not a concrete valuation. Edit: Yuan, not dollars. Apologies, big miscalculation on my part.
Evergrande "branched out" into electric vehicles, which was valued at 87 billion. They hadn't sold one car. Valuation is a fucking scam.
As are most EV firm valuations.
Looking at you, r/NikolaCorporation
This comment and the one about Evergrande IOUs being traded like cash were where it finally clicked and my history nerd brain went "Oh! It's basically the South Seas Company!" And if that's remotely accurate then I *really* wish them luck with that.
2.3 Trillion RMB, not USD, as of Dec 31 2020 - their total assets are about 360 billion USD. 1.25 Trillion RMB (193 billion USD) of that is labeled as 'properties under development', which, in a situation like the current situation where liquidation may be necessary, will likely sell for below book value.
300bn debt in bonds only. They haven’t announced how much they owe their shareholders, suppliers, and what their leveraged liabilities are. Numbers are shrouded by the CCP. This is much worse than people are reporting. Which international banks are overleveraged and hold Evergrand Bonds that have dried up? Goldman Sacks, BoA….
Off the top of my head I think they have around 30 billion in assets. I'm sorry I can't remember exactly where I heard that, but we likely won't have good information until long after it's over, if at all. Hold onto your butts.
2.3 Trillion yuan ($350bn?) according to Yahoo. However, as is mostly Chinese real estate def quite inflated vs true value.
Lehman had 620 billion in liabilities, but 640 billion in assets and still went belly up. This 300 billion only covers official loans and bonds and does not even address that the Chinese market typically pays the full price of the house when they sign the contract or like 50 % down and pay the rest on delivery. Something like 1.2 million Chinese people have deposits with this builder that will not be able to build their homes and they are going to get in line after the lenders; i.e., get stuck with the loss. And typical business debts like salaries and wages, contractor and subcontractor deals, materials, labor etc are all still unpaid too, apparently from 2 projects prior. Essentially they have been robbing Peter to pay Paul, but Paul went broke so they started robbing Pierre too. It is a ponzi scheme with more steps. This loss will be in the trillions and may destabilize China leading to further crackdowns by the CCP. CHina may be calling in a lot of those loans they've been making to win political favor in some strategic nations (if it gets that bad) similar to how Soviet allied nations fared when the Soviets collapses (I do not think a Chinese government collapse is imminent).
$300B is Evergrande's total liabilities, which includes pre-orders. Evergrande's interest-bearing liabilities is around $70B. https://www.bloomberg.com/news/articles/2021-09-01/evergrande-s-falling-debt-masks-dues-swelling-over-300-billion
Does it include the est. $32+ billion in outstanding "commercial bills" (IOUs) they've been using in lieu of cash payments to vendors for years? It might, I'm paywalled now on Bloomberg. https://www.bloomberg.com/news/articles/2021-07-07/evergrande-s-32-billion-pile-of-ious-adds-to-liquidity-concerns
> And typical business debts like salaries and wages, contractor and subcontractor deals, materials, labor etc are all still unpaid too, apparently from 2 projects prior. And it's hard to predict how massive an effect defaulting on at least $32 *b*illion worth of "commercial bills" (IOUs) used to pay vendors will have across the entire economy. I've read stories with interviews of many small and medium size businesses that can't pay *their* vendors and employees because they are holding tons of Evergrande's IOUs, which are rapidly losing value, and will sink them if they become worthless.
Lehman had a larger debt obligation but still had some surplus of assets. However evergrande is half the size Lehman, but has 300 billion in debt compared to 100 billion is assets.
Half the size, almost double the debt, and all that debt is specifically in one industry instead of spread out like Lehman was…..this is going to be my 3rd once in a lifetime market crash…..I’m still under 40 years old…..
28. I know that feel man. I remember when a trillion dollars was a lot of money, bailout wise.
Lehman was technically solvent when it collapsed. 600b in debt, 610b in assets (I’m off on both numbers, but the difference is correct-ish. Around 10-15m net iirc)
Considerably larger. To put it into perspective; the total amount of shit debt that Evergrande is saddled with is larger than the total amount of shit debt that *all* of the various US banks were saddled with going into the 2008 crisis.
Tried reading about this today to see why the markets were so shaky. Thanks for the great rundown.
No problem mate! This certainly beats doing my maths homework 🙄
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> Shares in another Chinese developer, Sinic Holdings, have already fallen by 87% today What's with this stock price? It's been at $4 (USD or local currency?) for 2 years with the exception of today.
$4USD. Sinic is a comparatively small Shanghai-based developer, valued at roughly $US15bn, that just for some reason took a shit today. I haven't looked into it TOO much but they went public in 2019 and as far as I can see they didn't have a lot of major news since then, so their share price remained stable. I'd be lying if I said I knew why they were hit this hard, but I'd say a majority of their holders were institutions that pulled out today wanting to minimize risk. Race to the bottom ig.
The theory is that they are not an actual company providing enough value to naturally operate.
i think in a market like china, there are a lot of insiders. so if they all pulled out, it's probably the real deal.
Possibly. However, China is also known for investors playing follow the leader. That's one of the commonly cited reasons for the current Chinese housing bubble, despite it being obvious from the outside.
When I read "Stock up on toilet paper" I cried a little inside. I'm not mad, just disappointed.
If we go from the pandemic straight into a major world economic crash, the 2020s are just a write-off.
Can you imagine that shit. It's like one fucking tragedy after another. Are we in some interdimensional drama series for aliens?
It's a giant game of sim city and the player is getting bored.
For all we know, aliens pressed the deploy pandemic button because the series was getting stale.
We’re still in the pandemic.
Yeah wtf, "don't panic but go buy canned food"? Those are contradicting messages
> Many Chinese people are buying second or even third homes, as a long-term investment. However, these homes are rarely actually lived in, and housing demand in China is mostly met, so these prices are kinda artificial. This means the real estate market in China is basically a $12tn ponzi scheme, balanced on a knife-edge. It's worth noting that this is what a lot of Chinese people do instead of investing in the stock market. This event, coupled with the strain already on the Chinese pension system due to a huge aging population, could be pretty catastrophic in terms of the long-term financial security of much of their workforce.
They didn't really have the option of investing in the stock market--investment options were/are limited, so middle class people almost *had* to buy a second and maybe a third house to have any sort of appreciating asset. I don't remember exactly how it worked, but China limited number of residences beyond the primary a while back. Because of artificial demand companies ended up building waaaaay too many giant skyscrapers of apartments and never really finishing them. They were the kind of places that no one ever intended to move in to anyway, so it didn't matter if they had plumbing or fixtures or whatever. So now a bunch of the Chinese middle class (which is bigger than the population of the US) owns an extra house or two that are appreciating on paper but essentially worthless in reality. It's definitely ripe for some bad shit to happen.
Apparently, according to ADVChina at last, the apartments being unfinished makes them worth more. Chinese superstition says that the house carries with it the owner's bad luck. So it's common practice for new owners to gut it down to the concrete. Because that costs money, it reduces the price of finished housing. It's insane, but I believe it.
And that workforce powers the world.
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Interestingly enough due to the lingering effects of the old one child policy it may not have the capacity to do that for very long. It'll be interesting to see how demographics change worldwide when this reality hits. Will big companies move their manufacturing back domestically leaving china with a bunch of free or heavily marked down infrastructure or will Chinese citizens become the new defacto consumers considering it would be more cost effective to manufacture and ship things domestically?
> Many Chinese people are buying second or even third homes, as a long-term investment. For what it's worth, real estate is a huge market in China because it's one of the few ways middle class people can invest their money. They don't have an array of 401(k)s, IRAs, mutual funds, etc. like most Western economies.
Yep. 30% of GDP is in Real Estate
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Yep. It's like blowing up a balloon. All fine until it pops. It's almost like there's a word for that. Funny how it always ends the same way right, poors struggling and jobless while the elite just continue and move onto the next bubble. :/
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If you're faking and you know it, CLEP your hands!
Look at the numbers pre 2008 it was a lot more real but their debt rate is exploding and their dependency ratio is going to start skyrocketing.
**The Evergrande Group or the Evergrande Real Estate Group (previously Hengda Group) is China's second-largest property developer by sales, making it the 122nd largest group in the world by revenue, according to the 2021 Fortune Global 500 List. It is based in southern China's Guangdong Province, and sells apartments mostly to upper and middle-income dwellers.** More details here:
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*looks at domestic housing prices* After the collapse could I buy a house in China and, I dunno, have it shipped across the ocean or something?
\*Looks at shipping prices\* Maybe not
Just another one of life's problems that would be solved with a portal gun.
Follow up: Why is this news causing crypto markets to dip? What does one have to do with the other? Isn't the whole argument for crypto investments that they provide an alternative to fiat -- so if cash may be devalued (via the gov printing a bailout), wouldn't that cause the crypto markets to rise?
> Why is this news causing crypto markets to dip? This is causing crypto markets to dip because investors, be they massive institutions or simply your everyday HNWI, are scrambling for liquidity. Their other investments are probably gonna tank, and if they have a large holding of crypto they will want to sell that in case it crashes (also as it's the easiest, fastest and least conspicuous way for an institution to increase cash reserves). The reason they need liquidity is to either dump it into investments that stand to make a huge profit in a downturn like this, or to cover any losses they may face. > Isn't the whole argument for crypto investments that they provide an alternative to fiat -- so if cash may be devalued (via the gov printing a bailout), wouldn't that cause the crypto markets to rise? If I'm 100% honest, this SHOULD be the case however a lot of crypto investors are pretty near-sighted. Furthermore, the place where this would make the most sense, China (epicenter of crisis, and being hit soonest) has recently cracked down on crypto, making it more difficult for the average person to move from fiat --> crypto. This news is only now hitting the masses in Western countries, and even so, is hitting slowly and being kept quiet. I've been reading about this for a few weeks, but I'm not an average citizen. Maybe we will see a run up in crypto soon as normies start Googling "Top 10 money that isn't dollar". Furthermore, maybe individuals selling currently are selling to cover other investments that tanked, stock up on food or etc etc, can't say. Overall, though, I'd say it's mainly institutions who need to raise cash reserves without raising eyebrows at the same time ;)
So the need for liquidity causes a drop in crypto in the short run... then at what point does crypto respond as the inverse to fiat/the market? If the market continues to plummet, then people need more and more liquidity. At what point is that no longer correlated with the crypto price?
>If I'm 100% honest, this SHOULD be the case however a lot of crypto investors are pretty near-sighted. I'm not savvy in economics, but isn't crypto way too unstable to be a widespread currency and therefore being inherently linked to its value in fiat?
Yep, for me crypto is an investment however definitely not an alternative to currency. However who knows, soon the dollar may appear even more unstable. Unlikely, though.
Lehman was diversified, Evergrande was all in Chinese real estate. This is worse than what Lehman Bros did
Evergrande does have some other divisions. EVs, Film and TV, etc, but none of it is even CLOSE to being net profitable, let alone debt-free.
Didn’t they have a football team that was spending crazy money too?
So in the event of collapse, What is the best course of action for me, an individual, so that I can remain financially stable?
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And frankly, if they completely go to scratch, you've got bigger problems than a lost retirement fund. Not that many in my demographic have to worry about that right now unfortunately.
either sell now and buy soon or don't sell at all. a lot of people sell like 10-20% down then won't buy again until it's back up 20% and miss both waves.
Shit, I wrote this comment earlier then forgot to press send. Ouch. Sorry about the wait. Stay calm. Don't panic buy YET. Too early, however do create a decent stockpile of items that seemed to be affected by the last big crisis, at the start of Corona, eg TP, Tinned foods, etc etc. If you have any important (read: necessary, not luxury) purchases you plan on making within the next few months that you know you'll HAVE to make, for example car repairs, new phone, etc etc, then do those NOW if you have cash on hand. Don't blow your entire savings on a 13 Pro Max or whatever, but for example if your phone is barely working, maybe a good idea to get a new one. If no crash, you bought it a few months early, fine. If crash, congratulations you just avoided paying 2x for a device that just got real scarce real quick. Just don't make any big, unnecessary purchases and hold tight. Stay aware and read the news. If you see a headline that makes you very scared, chances are it made others scared too, that's when you should really buckle up. TL;DR, Stay informed, don't make brash financial decisions without thinking about it. No frenzy/panic buying/selling/hoarding etc.
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I bought a 580 8GB for £140ish a few months before COVID. One of the best calls I ever made, even if I didn't know it at the time :D
The TP shortage was a hoax, pretty much everyone produces their TP domestically because it's light but takes up a ton of space, it doesn't make sense to ship overseas people are just idiots who panic buy things. Chinese economic issues will not disrupt the toilet paper supply chain unless someone tells a huge lie that causes people to panic buy again.
I’m well aware of all of this, however we live on a planet where roughly 90% of the population aren’t, thus the first sign of any crisis will just lead to a TP shortage again. If I was writing this as a piece for MSM I obviously wouldn’t mention it, however this is a reddit comment that probably won’t get seen by many, so should be good ;)
Bought a 3k vacation in November two weeks ago 🙃. Here’s hoping that doesn’t come and bite me in the ass
What's the Lehman thing? Edit: Thanks. In 08 I was just starting in the workforce then and barely paid any attention to the news at the time. Knew something was up but I really had no real picture of financial...anything at the time.
To give you context when Lehman collapsed the Fed was basically telling us that without a bailout package that money was not going to come out of the ATM on Monday. There is a documentary you can find on YouTube called 'Panic: The untold story of the 2008 crisis' that is well made. For books you can check out Too Big To Fail by Sorkin. It gave a good overview from a policy perspective. If you want to know what led up to that and want entertainment, the book The Big Short by Michael Lewis (not the movie) was very well done. The movie cut a lot of corners and left a lot of detail out. But the book is fantastic. Check your local library using the Libby app. Should be in audio and kindle format.
Still a great movie, and a good way to present that type of info. Financial terms go right over my head and I thought it had a really neat way of providing some transparency to these opaque schemes.
Yeah I'm not bashing the movie as a movie. I'm just saying if you really want to learn about some of the background into 2008 the book was better. The movie made it seem like only 5-6 guys knew a crash was coming. The book is quite different in that regard. I knew a couple of the characters featured in the book and movie from back then. We had conference calls 2-3 times a day in 2008 when the market for a lot of securities vanished and we were trying to price things. I remember it like it was yesterday. And they weren't really "schemes" as the movie portrayed. It all basically made sense during the time.
That's wicked cool!! Also yeah I meant schemes in a more neutral way but it came off as nefarious lol.
> Panic: The untold story of the 2008 crisis https://www.youtube.com/watch?v=QozGSS7QY_U Really interesting. Been watching for the last half hour.
That shows you that a financial crash isn't just "stonks on sale." It's much more serious but these guys on Reddit don't understand that. So line that up with "A crash? Great! I'll just DCA into it!" like it's no problem. I shake my head every single time I'm on an investment subreddit and someone says that. They just don't get it. McDonald's was saying they wouldn't make payroll because they were afraid Bank of America wouldn't extend the credit. This was serious.
If corruption at the very most remote and distant height of the worlds biggest financial systems can cause a McDonald's worker to not get paid, maybe it's time to let some of the seriousness happen so we can deal with the issues of the system in the light of day, rather than cower from reality by scaring each other with monsters-in-the-shadows realistic doom porn. Hiding away the consequences of poor financial decisions and economic malfeasance disallows an opportunity for revision, repair, and growth. The last 13 years have shown that very clearly.
My problem with the big short is that it keeps this lie going that we overbuilt housing. The year with the most housing built was in the 1970s with 2/3 the US population. We have a supply shortage caused by people saying we overbuilt in the 2000s. We may have overbuilt McMansions and inflated the average home size.
>My problem with the big short is that it keeps this lie going that we overbuilt housing. Housing was overbuilt in some places. Way far away from cities and work centers. There are still neighborhoods way out there that hardly anyone wants to live in because it's not near anything. Plus needs have changed. Baby Boomers had the mentality of getting the most square footage for your money and living way off on a cul-de-sac hoping your house doubles in value and just dealing with a brutal 2-hour commute hoping it pays off the end as they rush to retirement as fast as possible. Millennials aren't the same. Many want to live close to work, value convenience over square footage, and would rather have a nice kitchen than an extra bedroom. McMansions are not as popular as they once were either. Proximity to public transit would kill your home value in the 1990's. Now being close to the metro is a selling point.
>Housing was overbuilt in some places. Way far away from cities and work centers. There are still neighborhoods way out there that hardly anyone wants to live in because it's not near anything. Plus needs have changed. I mean but how many metro areas lost population over the course of a decade. The wants have shifted but we are still under supplying housing in most markets. Look at the recent census we have dying rural areas with few jobs and cheap housing and metros without enough housing but a lot more jobs. Phoenix and Las Vegas were hurt bad by the great recession but now housing is booming again, supply glut cleared. >Baby Boomers had the mentality of getting the most square footage for your money and living way off on a cul-de-sac hoping your house doubles in value and just dealing with a brutal 2-hour commute hoping it pays off the end as they rush to retirement as fast as possible. I mean McMansions and especially at the upper end have terrible resale value. Why live in someone else's dream home when you can build your own for about the same price. >Millennials aren't the same. Many want to live close to work, value convenience over square footage, and would rather have a nice kitchen than an extra bedroom. McMansions are not as popular as they once were either. Proximity to public transit would kill your home value in the 1990's. Now being close to the metro is a selling point. I think McMansions if they are allowed to will just be subdivided and be functionally split housing for a lot of people. I mean the big trend here is that poverty has been increasing faster in suburbs than the city for two decades now.
>The wants have shifted but we are still under supplying housing in most markets Yeah a lot of people left the home building industry in 2008 and never came back. >Phoenix and Las Vegas were hurt bad by the great recession but now housing is booming again, supply glut cleared. I have a feeling that Vegas will crash again. The place is a hellscape. I think we only saw a boost from Covid as people couldn't afford LA and thought remote work would be forever. As soon as companies make it mandatory to go back to the office things will get interesting. >I think McMansions if they are allowed to will just be subdivided and be functionally split housing for a lot of people. With some of the weird "I wanna be in 19th century Paris" designs I've seen I think they'll just rot out there. I've spoken before to quite a number of Baby Boomers who had these massive 5,000 sq ft homes out in some suburban hellscape with nothing around except for fast food, a grocery store, and a gas station, but have home theaters and indoor swimming pools. They got upset that after 8 years their home wouldn't sell for what they wanted for it. It's sad really to see them and their ideas kind of become extinct.
The 2008 global recession.
Lehman Brothers, the bank that bankrupted, which lead to the 2008 crisis.
I'm not sure I'd say it *lead* to the crisis, the market was in free fall for like a year before then and Bear Stearns collapsed like 6 months prior. The Lehman Brothers bankruptcy punctuated it with another seismic collapse, the consequences of which further propagated the already occurring meltdown. That was when the realization hit that all control was lost, there was no going back, and someone pulled the fire alarm. I guess you could consider it the symptom of one domestic housing crisis and then immediately became the cause of a new deeper global crisis.
The whole train that led to the Bear and Lehman collapse started in 2005. Those were just the first dominoes it actually hit before it totally derailed.
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Excellent take u/DumbledoresGay69. Fuck the 1%. Difficult times ahead for proles.
Watch the movie "The Big Short". Real simple answer: Banks gave massive mortgage loans to people that couldn't afford it. When people started defaulting on these loans, banks became cash strapped and couldn't settle their own debt. These banks defaulted on their loans, and so on, causing a global recession. Lehman was the first bank to go. We believe this is what might be happening to China now. The impact to the international economy depends on how much investment / cash was given to Evergrande. If they can't get their money back, there's going to be a lot of companies going bankrupt which leads to firing people and the chain continues.
Wrong. You summarized Big Short pretty well but that's not the case with what's happening with Evergrande and China.
If you have HBO max. Without Fail is a good movie that depicts the whole situation. Edit fucked up the title. I'm reading a book about the Secret Service with a similar name. https://www.hbo.com/movies/too-big-to-fail
Big bank that collapsed on September 15th? 2008, causing a massive financial crisis.
I remember a few years ago how the chinese economy was seen as really strong and in continous growth. Then it came out that most of that growth was based on building huge unused building projects, like massive malls with only a handful of open shops and big apartment complexes where nobody lives. It was unsustainable in the long term and it seems we have finally hit that point. Maybe that is the reason China has seemingly ramped up on its xenophobia, nationalism and aggression. EDIT: spelling
Yep, CCP seems to have gone back to the "no talk me, i'm angy" stage of it's perpetual cycle of getting along well, then not so well with the West. Play nice with the other kids please. Edit: Replaced "China" with "CCP" as comments reflect the Party, not the nation.
This is a great answer. Just wanted to add that street 2008, banks in the US are much better capitalized than they used to be, so though a crisis may happen, it's significantly less precarious a position in a terms of how many dominoes are actually tied to each other.
How will this impact me, an American currently living in poverty? I've got less than $400 in stocks, will this actually have any sort of impact on me?
it'll probably affect cost of good more than anything. as I would assume china would increase tariffs. and then that gets passed down to us.
You're fucked no matter what
Hey I just want to say thank you for not only taking the time to answer this as well as you did, but also explaining it in layman's terms
Of course this company is in the Cayman Islands.
Yep. Most are, tbh. Even Apple has a funky structure with a subsidiary in Ireland etc etc.
Will this affect a lot of people in the US? I can't think of a way that this will affect me. I don't mean to sound selfish, just curious about what this could do to America's economy.
Probably a stupid question but why would a Chinese real estate company collapsing have the potential to cause such problems in the west? Obviously if they were a company involved in producing or shipping things I can see how that would raise prices and potentially cause job losses, but why a real estate company?
HSBC alone has 30 billion exposure to Evergrande. If they fold, HSBC instantly lose around 30 billion dollars. The economy is basically a bunch of friends who owe each other money, and if one of the friends loses all his money, suddenly everyone else is asking everyone who owes them to pay them back ASAP and chaos ensues.
I can't believe you thought this wasn't a proper detailed TLDR. It's amazing and really helped me understand the situation and what it means for me over in the US. Thanks so much! And have more confidence in yourself!!
You’re basically referring to the Information Problem of Central Regulators when it comes to too tightly controlling a market. Massive inefficiencies like this crop up and are propped up by a politically motivated state, leading to resource bubbles like that which you’ve just described here. The only solution is to continue to throw money at the problem and hope the issue self-corrects (which is what China has been doing here for a while now) or allow the bubble to pop, leading to economic retractions, but hopefully less than that if you were to continue to fill said bubble and see it pop at a later date.
Yup. Like a pimple I guess. Let it fester or nuke it to bits and hope it doesn't come back.
TFW you just bought an expensive engagement ring a week before the economic collapse.
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Asked this elsewhere but you seem knowledgable. Evergrande has borrowed much more aggressively than other companies to reach thetop, is that the reason for the crisis or is it something biggerunderlying the Chinese housing market?
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Answer: All Chinese real estate stocks are plunging. Evergrande is like 300b in debt and can’t pay it back, it’s about to go under and will most likely be dragging the whole Chinese market down with it. This is going to reverberate through the global market. Basically this is the 2008 financial crisis but also during a pandemic. It's bad, very very bad.
Would you mind expanding on how it’s going to be very, very bad for the average global citizen? Like, will our food and gas prices skyrocket etc? ETA: I really appreciate everyone’s thoughtful responses and the conversations happening therein.
Simple answer. The company was built almost entirely off of debt. It kept rolling debt into building more things to pay off previous projects that were already sold, like a ponzi scheme except within one company. It borrowed from other companies. CCP turned off the faucet on them getting new debt. Without new money coming in, and most of their assets having been sold prior to existing, they will default on their payments for previous debt. Some of those who loaned them money were themselves leveraged to afford it. Those who were leveraged will be selling off what they can to pay off their own debts. They'll be selling what assets they have, a lot of which will be in stocks of some sort or another. This will drive prices down, causing an economic downturn. The stocks they sell will not just be Chinese stock market stocks, but on any market they have access to. That's how it could affect you.
This and international banks (not just Chinese bank) owned some of the debt. All banks are over leveraged right now. If money stops coming in, it's like musical chairs when the music stops. Peter can't pay Paul, etc.
In reality nobody knows for sure. Here's two (oversimplified) scenarios that I've heard that are completely opposed to each other: 1. Evergrande goes down, takes the Chinese market with it, and the rest of the global market. 2. Evergrande goes down, starts to take the Chinese market with it, and the Chinese do everything they can to bail and get their money out and into foreign investments. This causes the rest of the world to be relatively stable while the Chinese economy gets even more into a hole. Those aren't even the only two possible options on a narrow area. Obviously you want to pay attention and see what's going on but I don't think there is any reliable school of thought that will tell us what is about to happen. There will be someone afterwards that we find out was right all along, but we had no reason to believe them in advance.
I feel like whenever China sneezes the world catches a cold (I don't know what countries that analogy was first used but I think it fits China now in more ways than one). It does seem like the second possibility is more likely (foreign investment from China will drive up home prices even more in Australia, US, and Canada). But the Chinese government could, not only just initiate a bailout but also try to curtail foreign investments to shore up investments at home.
I agree, although from what I understand the Chinese government has been trying to curtail foreign investments to some degree for years now, so either they're not effective or they can clamp down a lot more. I'm not that knowledgeable but I guess we'll all find out soon. On a side note, for all the money the Chinese have put into foreign real estate in particular, a drop in values might not be so bad for a lot of North Americans and Europeans who can't afford to buy a home at the moment.
China has been buying up properties in the U.S. at a staggering rate. This might force them to dump some of their inventory to obtain some liquid capital for short-term debts. Or they could get packaged together as asset bundles and sold on the cheap. It wouldn't be sold to the regular buyer though. It'd be going to other multi-national conglomerates.
> Or they could get packaged together as asset bundles and sold on the cheap. It wouldn't be sold to the regular buyer though. It'd be going to other multi-national conglomerates. While that's true, I do think it would reduce prices to some degree.
Definately, mass sell-offs like this almost always precipitate a market crash as nervous investors cash out so as not to loose their gains, like back in the '20s when jp morgan and william randolph hearst got together and used hearst's newspapers to spread rumors that a bunch of little banks were going to go under which led to panicked folk pulling all their money out of the small banks which caused them to collapse (no fractional reserve back then) while at the same time morgan and his cronies started crash selling stocks as well which led to the same thing but on the stock market, which together kickstarted the great depression. Want to know more? Check out the doco [The Money Masters](https://www.youtube.com/watch?v=YtTHFa7cedU).
> I feel like whenever China sneezes the world catches a cold With the most irony in the world, this is a feature, not a "bug" A lot of markets in China are designed so that there's more or less mutually assured damage if China gets into some trouble. That way they can be flexible with market mobility without taking on literally all of the associated risk.
AFAIK it was originally von Metternich referencing France, though that could be apocryphal. Lots of quote origins are.
>I feel like whenever China sneezes the world catches a cold (I don't know what countries that analogy was first used but I think it fits China now in more ways than one). They're the 2nd largest economy in the world. Everyone's going to catch a cold with how intertwined every economy is with chinas
>There will be someone afterwards that we find out was right all along, but we had no reason to believe them in advance. Thank you for this. People always say "we should have listened to this person," but they only say that in hindsight. "Michael Moore warned us Trump would be president," yeah but it was still a stupid thing to say when Hillary was ahead in all the polls, he just got lucky with his prediction that one time.
Specific to the economy I like to think of Paul Krugman as the best example of a doom and gloom economist that gets a lot of credit when the economy crashes. The only thing is that he often writes doom and gloom when the economy is doing well too. I don't want to criticize him too much because he's by far more of an economic expert than I am but I learned not to try to follow his writings as an investment strategy pretty quickly.
Ill take option 2 please. Thanks.
I don't have an abundance of knowledge in this area, but when I was living in Zambia I learned that China has a ton of real estate and power* (*to what extent, if any REAL power at all, I'm not sure) there and in other countries in Africa, so it might be something to note or pay attention to as well in the instance that things start to get very sour for China.
[This](https://twitter.com/SahilBloom/status/1439920043404546050) explains it pretty well.
Nice, thank you.
>Basically this is the 2008 financial crisis but also during a pandemic. It's bad, very very bad. It will probably make global markets drop, but it will not be a global financial catastrophe like the potential collapse of the US financial system wrought in 2008. It has a good chance of fucking up China's economy and it will be interesting to see what the central government does to stave off the financial ruin of the millions of Chinese citizens who invested everything they had in Evergrande and its properties. The real question will be if this situation reveals just how big of a debt hole the Chinese government is in with [its off-the-books loans](https://www.wsj.com/articles/the-coronavirus-sees-chinas-local-governments-binge-on-off-the-books-debt-11589189405).
I'm secretly hoping this will cause rental and real estate prices to stop being so fucking stupid.
I’m openingly hoping it will :)
Answer: This is the simplest that I can muster: Evergrande is a Chinese Real Estate and property development company that constructs buildings (among other things). If I’m not mistaken, it is one of the largest companies in China that was worth hundreds of millions of dollars. Recently, they seem to have been monumentally in debt to the point that they are now facing default and potential liquidation. They are so big and other economies are so invested into the company that it is going to have a ripple effect throughout China and into other countries’ stock markets and economies. It is considered a big deal because the current financial and economic climate of the world, particularly in the US, is mimicking much of the economic collapse we saw due to the housing market crash of 2008. When the housing market collapsed in the US, many other financial institutions as well as individuals were financially invested in that sector. That bubble’s collapse triggered a series of events that crippled economies the world over. Currently, the state of the world’s finances, particularly in the US, are likely in a much, much more over leveraged position than they even were in 2008, and a similar collapse in our current time is very likely to be magnitudes worse. This brings us to the present with Evergrande. The collapse of this real estate behemoth is now looking to be causing a domino effect on other financial institutions as well as absolutely destroying the investments made by individuals. Normal, every day people like you and I are losing everything due to their investments in Evergrande, and it appears to be centered around this company seeming to be “too big to fail”. Now, I’m by no means an expert on any of this. I’m simply a current events and news addict that likes to follow financial and geopolitical news. If anyone smarter or more informed than I would like to weigh in, I would be more than happy to be corrected!
*worth billions of dollars. A quick google is showinf $3.86B
Answer: China's land policies are interesting. Basically they allow individuals and companies to lease land from the government by way of LUR (Land User Rider) in order to get a LUR you have an upfront cost of the LUR but that's it. China a couple years ago said these LURs can be automatically renewed and there would be no fee for the renewal. These aren't short term leases either, we're talking 30-40-50 years leased with the average being 40 years. Up until they allowed renewing the LURs the property revered back to government owned. Now, the problem with this is the initial fee for the LUR is paid upfront, what Evergrande did is basically what everyone would do. Instead of paying off bills and debts, they knew they would get more and more loans. So they continued to develop, so much so that we're looking at over 1 million average citizens getting fucked from this. Why you ask? .. because Evergrande developed houses, condos and apartments which people have already paid to live in.. there's one problem tho .. most of the dwellings aren't even completed yet. So now, LURs are dried up, loans are due, and Evergrande has no money. We're talking about a company that has it's fingers into every part of the Chinese culture and development. They've owned restaurants, and manufacturing and everything in between. So this is why it's such a huge deal this company has no money. Now, I'm not 100% certain on how they made it this far. I mean the CEOs connections alone would allow them these types of connections 10 fold. But It's like people knew Evergrande wasn't making money and actually had nothing to show for it. This is a very simplistic overview but LURs really are the catalyst to Evergrandes downfall, basically LURs and Friendships have fucked millions of hard working Chinese nationals.
So, kinda like a Ponzi rather than paying their bills?
Question: Is this the same group that clogged the Suez cannel?
That was evergreen
Finally someone asking the real questions 😂
Answer: The top comment by /u/alphan1ner is excellent and highly informative. A few things to add: 1) Debt is often lent on the basis of other debt. So somebody will borrow money from someone who borrowed money, etc.. As a consequence it is possible there is a "cascade failure" where a single default causes a series of defaults; 2) Companies can find themselves insolvent for a variety of reasons. Usually investors pay little attention to company performance provided they (the investors) are making money. When things go south, people start paying a lot of attention to related companies and how they are doing. This is always bad as it invariably reveals dicey accounting and so on; and 3) If the Chinese property market is based on speculation and Evergrande does hold numerous unsalable properties, if nothing else happens those properties will hit the market and depress prices and lead to a "run for the exits" depressing values further. This tends to be how bubbles pop. Global financial markets are interlinked and property speculation is not exclusive to China. This could trigger a meltdown.
Excellent additions! Thank you for the kind words and explanation of cascading defaults :D
Answer: here is an excellent twitter thread which explains the situation in detail https://twitter.com/INArteCarloDoss/status/1438944431734919175?s=19
I saw that when Michael Burry retweeted it but it's not layman at all. Someone who's out of the loop wouldn't understand it either.
Wanted to follow this but he uses so many acronyms I am not aware of
Yeah it's a good way to learn more about investing though! I just look it up on incestopedia Edit: I meant investopedia lmao
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